CUAC Regulatory Review A Critical Review of Key Consumer Protections in Victoria

Transcription

1 Interim, April 2015 CUAC Regulatory Review A Critical Review of Key Consumer Protections in Victoria A CUAC RESEARCH REPORT Volume 1 May 2015 Falling through the net: the loss of Victorian energy consumer protections

2 The Consumer Utilities Advocacy Centre Ltd. (CUAC) is a specialist consumer organisation established in 2002 to represent Victorian energy and water consumers in policy and regulatory processes. The views and errors contained in this report remain ours alone. An appropriate citation for this report is: CUAC (2015), CUAC Regulatory Review: A Critical Review of Key Consumer Protections in Victoria, Consumer Utilities Advocacy Centre Ltd., Melbourne. Lead authors: Deanna Foong, LL.M., Master of Conflict Resolution, LL.B (Hons) Loren Days, LL.M., Juris Doctor, B.A. Contributors: Mercedes Lentz Martin Jones Karl Barratt CUAC would like to acknowledge the contributions of other consumer advocates who have contributed their expertise and time to this report. Consumer Utilities Advocacy Centre Ltd. (CUAC) 172 Flinders Street Melbourne VIC 3000 P (03) F (03) ACN

3 Contents List of Abbreviations... ii List of Figures and Tables... iii Executive Summary... 1 Introduction... 3 Background... 4 Recent Developments... 5 About this Report... 6 Analysis of key consumer protections... 8 Market Retail Contracts... 8 Fees & Charges Disconnection Rising Disconnections Scrutiny on Disconnections Connection & Reconnection Payment Plans Capacity to Pay Early Identification Deficiencies in Consumer Protections Hardship More Customers Failing Hardship Programs Deficiencies in Consumer Protections Exemptions Existing & Emerging Technologies Smart Meters New Products, Services, and Business Models Network Tariff Reform Fixed Term Contracts Prepayment Meters Voltage Variation Conclusion Appendix A: Report Recommendations Bibliography i

4 List of Abbreviations ACCC Australian Competition and Consumer Commission AEMC Australian Energy Market Commission AEMO Australian Energy Market Operator AER Australian Energy Regulator AMI Advanced Metering Infrastructure CALC Consumer Action Law Centre COAG Council of Australian Governments CUAC Consumer Utilities Advocacy Centre DNSP Distribution Network Service Provider ERAA Energy Retailers Association of Australia ERC Energy Retail Code (version 10a, December 2013) ESC Essential Services Commission of Victoria EWOV Energy and Water Ombudsman (Victoria) HAN Home area network HC Harmonised Code (version 11, 1 January 2015) IHD In-home display MRC Market Retail Contract 1 NECF NEM NERL NERR OIC PPM SCC National Energy Customer Framework National Energy Market National Energy Retail Law National Energy Retail Rules Order-in-Council Prepayment Meter Shortened Collection Cycle SRC Standard Retail Contract 2 WDP Wrongful Disconnection Payment 1 The term MRC which is used in the HC, was previously known as a market offer under the ERC. 2 The term SRC which is used in the HC, was previously known as a standing offer under the ERC. ii

5 List of Figures and Tables Figure 1: Disconnections and reconnections in Victoria Residential and business, electricity and gas, 1990 to Figure 2: Wrongful disconnection payments per month (January 2010 February 2015).. 15 Box 1: Why do customers fail hardship programs? Box 2: Areas of concern identified in the AER s Review of Energy Retailers Customer Hardship Policies and Practices iii

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7 Executive Summary This report, CUAC Regulatory Review, critically examines the Victorian energy consumer protection framework contained in legislative and regulatory instruments. The key findings and recommendations of CUAC s report provide a timely evidentiary review of the subtle losses already experienced by Victorian consumers and anticipates the loss of further consumer protections. This review has been conducted through the lens of new technologies, the evolving energy market and the new Harmonised Energy Retail Code. 3 High disconnection rates, wrongful disconnections, a growing number of Victorian consumers experiencing hardship and household financial difficulties are increasingly the norm in the Victorian community. The Essential Services Commission of Victoria s Inquiry into the Financial Hardship Arrangements of Energy Retailers 4 is a welcomed paper paying special attention to the consumer protections relating to energy bill payment difficulties, hardship, and disconnection. CUAC s report identifies significant gaps in the current consumer protection framework experienced by Victorians. Key findings and recommendations from the Analysis of Key Consumer Protections section of the report are discussed below. For CUAC, it is important to review the regulatory framework to determine if it is able to effectively address and respond to current and ongoing changes in the energy market. This is to ensure sound consumer protections. CUAC s review questions whether the National Energy Customer Framework and the new Harmonised Energy Retail Code 5 are able to effectively respond to the substantial and complex changes that have occurred in the energy market, whilst maintaining a level of consumer protection previously experienced by Victorian consumers. Consumer protection is underpinned by the clear outline of consumer expectations and energy retailer responsibilities. CUAC has found that these key elements are not present in either the National Energy Retail Rules or the new Harmonised Energy Retail Code. 6 CUAC has found that poor drafting and the lack of clear definition of terms make interpreting provisions in a consistent manner challenging. This leaves the Victorian consumer in an increasing position of disadvantage. Today, 77 per cent of Victorian consumers are on market retail contracts. 7 This by far exceeds the situation in all other States. Most contractual terms and conditions that protected the general consumer were prescribed under the previous Energy Retail Code. 8 These protections are no longer prescribed in market retail contracts under the Harmonised Energy Retail Code. 9 Consequently, a significant proportion of consumers are potentially at risk of lower protections. For example, connection and reconnection timeframes no longer apply to market retail contract. 3 Version 11, 1 January Essential Services Commission (March 2015), Inquiry into the Financial Hardship Arrangements of Energy Retailers: Our Approach. 5 Version 11, 1 January Ibid. 7 Wallis Strategic Market & Social Research (August 2013), Victorians Experience of the Electricity Market Final Report, p.24: Based on the definition of being on a market contract presently, just over three quarters (77 per cent) of Victorians are on one, an increase from two thirds (68 per cent) when last measured in This is a figure from a 2013 report which has potential to be significantly higher at the time this report was written. 8 Version 10a, December Version 11, 1 January

8 Thus, households may be left off supply for a longer period of time by energy retailers who remain fully compliant with their obligations. CUAC s research has found that the payment plan, hardship and disconnection provisions are much weaker for the consumer under the new Harmonised Energy Retail Code. 10 There is no universal consumer right to payment plan options; the energy retailers hardship obligations are articulated in less precise language; and the timeframe between the issue of a bill and actual disconnection has been reduced. There is a real risk that more customers struggling to meet their bill payments will be vulnerable to disconnection. CUAC has been advocating for government and regulators to address the gaps in consumer protections for Victorian customers of energy re-sellers. CUAC has published its research in this area in 2012 Growing Gaps: Consumer Protections and Energy Re-sellers. 11 CUAC welcomes the Victorian Government s recent decision to review the exempt selling framework which removes a consumer s right to access alternative energy suppliers and choice of future smart technologies and services. CUAC supports the review investigating the root causes of exempt selling, including the connection and timing issues that may encourage property developers to choose embedded networks. The review should also consider the possible technical and planning solutions that may be able to respond to exempt selling and the potential for its increased prevalence in the expanding apartment and community developments. Some Victorian consumer protections are at risk of being eroded as regulatory frameworks do not have the ability to respond to new products and services and innovative business models. The question remains as to whether Victoria s smart meter consumer protections are sufficient to cover these emerging technologies and the risks that metering contestability might pose to Victorian consumers. For the Victorian consumer, network tariff reforms are fraught with issues of equity and investment. The Victorian Government needs to shape this process and help consumers understand and participate effectively in the reform process, encouraging industry to cooperate and help deliver consumer benefits. The interests of vulnerable and disadvantaged consumers need to be addressed as they are now faced with an increase in network fixed charges and energy bill. Prepayment meters are not a solution for customers experiencing payment difficulties or hardship. It is important that the current ban on prepayment meters remain in Victoria. CUAC s research is intended to alert the Victorian Government and the Council of Australian Governments (COAG) Energy Council to the regulatory gaps and to complement our response to the Essential Services Commission s Inquiry into the Financial Hardship Arrangements of Energy Retailers. 12 The report also underscores to the Victorian Government the consumer protections that must be retained should Victoria transition to the National Energy Customer Framework. 10 Ibid. 11 Consumer Utilities Advocacy Centre (December 2012), Growing Gaps: Consumer Protections and Energy Re-sellers. 12 Essential Services Commission (March 2015), Inquiry into the Financial Hardship Arrangements of Energy Retailers: Our Approach. 2

9 Introduction Victoria s retail energy market is the most dynamic and deregulated in Australia. The backbone of the Victorian energy policy framework has been the well designed consumer protection framework. Its aim is to facilitate the ability of consumers to confidently participate in the competitive energy market. 13 The progressive deregulation and privatisation of Victoria s energy supply system began in the 1990s. Full retail contestability was introduced in 2002 and price deregulation was introduced for all consumers in Subsequent reforms, in particular the mandatory rollout of smart electricity meters and the introduction of flexible electricity pricing, have strongly influenced the design of the Victorian energy market. As energy market reform continues to progress in Victoria, it is imperative, as a minimum, to maintain the existing levels of consumer protection prescribed in the framework. The erosion of consumer protections may undermine consumer confidence in the competitive energy market and discourage consumers from actively participating. This inevitably leads to poor consumer outcomes, especially at a time where there is increasing market complexity. The alignment of Victoria s energy consumer protections with the National Energy Customer Framework (NECF) has whittled away the protections that Victorians previously enjoyed. Decreased consumer protection and increased energy market complexity are not favourable to Victorian consumers. Under Victoria s Harmonised Energy Retail Code (version 11, 1 January 2015) (HC), which is based on the National Energy Retail Rules (NERR): Key consumer protections which were prescribed in market retail contracts 15 (MRCs) under the previous Energy Retail Code (version 10a, December 2013) (ERC) are no longer prescribed, leaving the majority of the market with lower consumer protections; Poor drafting has resulted in uncertainty in interpreting provisions this makes monitoring and enforcement difficult in this already challenging area for regulation; The customer hardship sections are less prescriptive than the ERC, allowing for subjective interpretation and less transparent enforcement; and The disconnection timeframes (i.e. timeframe between the issue of a bill and actual disconnection) have been reduced from the ERC. To date, no State that has implemented the NECF has adopted it without derogations. While certain variations may be required to reflect the unique circumstances in a State, the extent of the variations may suggest that the NECF is unable to accommodate the current energy market conditions and does not reflect best practice consumer protections. The market has changed substantially since the NECF was first drafted. CUAC believes the NECF is unable to accommodate and respond effectively to the new developments in the inherently evolving market. In CUAC s experience, it takes a significant amount of time to navigate an Australian Energy Market Commission (AEMC) rule change process to recommend changes to the NERR. Given the above, it is critical that the NECF be reviewed now. 13 The Electricity Industry Ombudsman Victoria opened in 1996 and later incorporated gas, water and LPG to ensure individual consumers were protected. The first Electricity Supply and Sale Code was introduced, following an 18 month consultation process involving industry and consumers. This code set a strong protection framework, which was subsequently extended to cover gas. 14 Essential Services Commission (May 2013), Progress of Electricity Retail Competition in Victoria Research Paper, p The term MRC which is used in the HC, was previously known as a market offer under the ERC. 3

10 Background The NECF creates a national regime for the sale and supply of electricity and gas by energy retailers and distribution network service providers (DNSPs) to residential customers and small businesses. The primary legal instrument establishing the NECF is the National Energy Retail Law (South Australia) Act 2011 (NERL). The NECF is adopted by participating jurisdictions via jurisdiction-specific implementation legislation. 16 In mid-2012, the then Victorian Government announced that it would defer Victoria s transition to the NECF. The Government said it would explore opportunities to align Victoria s retail and consumer protection arrangements with the NECF but only where this would not lower protections for Victorian consumers. In late 2012, the Essential Services Commission of Victoria (ESC) began the process of harmonising, wherever possible, the regulations contained in Victorian codes and guidelines with the NECF. The ESC released their final decision 17 and the first version of the Harmonised Energy Retail Code in July During CUAC s participation in the ESC s consultations on the harmonisation process, CUAC became aware that the HC would not offer the existing consumer protections. Rather, it would lower protections from those in the ERC. CUAC believes the reduced consumer protections may lead to more customers experiencing payment difficulties and hardship, and exacerbate the already high disconnection rates in Victoria. The energy market has been undergoing significant change, including greater numbers of consumers moving to MRCs and taking up new products and services as a result of smart meters and other emerging technologies. 19,20 None of these innovations were contemplated when the NECF was drafted. As the only State with a mandated rollout of smart meters, Victoria has extended its consumer protections to cover the smart meter environment. However, there are still gaps, as these protections do not cover the range of technological innovations now expected. A regulatory framework with appropriate consumer protections needs to be in place if these emerging technologies and innovative business models are to be introduced and deliver wide consumer benefits in Victoria. In March 2015, 21 the Department of Industry announced it would be reviewing the NECF to determine whether it requires reform to accommodate the changes in competitive energy markets, particularly in relation to the introduction of new technologies, products and services. The review will also examine the jurisdictional derogations that may allow harmonisation with the NECF. In this report, CUAC has suggested that the review be wider with a view to explore the strengthening of the provisions in the NECF. 16 The NECF commenced in Tasmania (for electricity customers only) and the Australian Capital Territory on 1 July 2012, South Australia on 1 February 2013 and New South Wales on 1 July Queensland aims to implement the NECF mid Essential Services Commission (July 2014), Harmonisation of the Energy Retail Code and Guidelines with the National Energy Customer Framework Final Decision Paper; Essential Services Commission (July 2014), Harmonisation Project: Consequential Amendments to Victorian Instruments Final Decision Paper. 18 The current version of the Harmonised Energy Retail Code is version 11, January The Australian Energy Regulator (AER) is undertaking consultations on innovative energy selling business models. See Australian Energy Regulator (November 2014), Regulating Innovative Energy Selling Business Models under the National Energy retail Law Issues Paper. Found at: <accessed 13 April 2015>. 20 The Council of Australian Government s (COAG) Energy Council is also looking at new products and services. See Energy Market Reform Working Group (December 2014), New Products and Services in the Electricity Market. Found at <accessed 13 April 2015>. 21 Announced at the 5 March 2015 public consultation on new products and services in the electricity market. 4

11 Recent Developments Energy market reforms to date have led to mixed outcomes for consumers. Increased levels of competition in the energy market have not translated into universally improved outcomes for all consumers. Victoria now has the highest disconnection rate in Australia and wrongful disconnections have increased considerably. 22 The Energy and Water Ombudsman (Victoria) (EWOV) reported an increase in complaints in the last financial year. 23 At the same time, work by the ESC has found large and growing retail margins in Victoria.24 In addition to the high disconnection rates and the large number of customer complaints, 25 affordability of essential services has become a major problem for many Australians. The ESC reported that for more customers: Participated in hardship programs; Entered hardship programs with higher debt levels; Remained in the hardship program for a shorter period of time (it is unclear if this is due to a failure to comply with the terms of the hardship program); and Failed hardship programs as compared to the previous year. 26 The growing number of EWOV affordability cases suggests that there are problems in the way energy retailers are managing customers experiencing payment difficulties or who are in financial hardship. A recent report by EWOV suggests that there is a strong correlation between the disconnection rate, the number of wrongful disconnection payments (WDPs) and the hardship support offered by energy retailers to customers experiencing financial hardship. 27 EWOV s research identified five areas where energy retailers could do more to help customers: the provision of effective hardship support; setting sustainable payment plans; improving communications and customer engagement; providing better customer support before disconnection; and taking more reasonable debt collection action. The conclusion sets out an action list that energy retailers, government and regulators could take to help address affordability. 28,29 The increase in disconnections prompted the ESC to hold a forum for energy retailers and consumer advocates in March 2014, alerting industry to take action to address this problem. Subsequently, the Energy Retailers Association of Australia (ERAA) held a national forum and instituted a series of industry and consumer working groups to develop a way forward. To date, the working groups have achieved little. 22 Essential Services Commission (December 2014), Energy Retailers Comparative Performance Report Customer Service , p.26-27; Essential Services Commission (April 2015), Energy Retailers Compliance Report , p Energy and Water Ombudsman (Victoria) (2014), EWOV Annual Report 2014, p Essential Services Commission (May 2013), Retailer Margins in Victoria s Electricity Market Discussion Paper, p.15; see also SKM MMA (May 2013), Analysis of Electricity Retail Prices and Retail Margins , Report for Essential Services Commission. 25 Essential Services Commission (December 2014), Energy Retailers Comparative Performance Report Customer Service , p.26-27; Energy and Water Ombudsman Victoria (2014), EWOV Annual Report 2014, p Essential Services Commission (December 2014), Energy Retailers Comparative Performance Report Customer Service , p Energy and Water Ombudsman (Victoria) (March 2015), A Closer look at Affordability: An Ombudsman Perspective on Energy and Water Hardship in Victoria, p Ibid, p.3, Financial Counselling Australia reviewed and compared the hardship practices in the banking, energy, water, and telecommunications sectors and identified six key factors that make the greatest impact on hardship policy and practice access, early identification, sustaining good performance, attitudes and culture, the business case, and concession and grant frameworks. See Lauren Levin and Fiona Guthrie (March 2014), Hardship Policies in Practice: A Comparative Study. 5

12 The Victorian Government s ESC Powers document 30 articulates a series of measures that will help to put the interests of consumers at the front and centre of energy retail policy. This includes enhancing the powers of the ESC so that it operates with more flexibility and has the power to protect consumers in line with best practices available to the Australian Competition and Consumer Commission (ACCC) and the Australian Energy Regulator (AER). The Victorian Government has recognised that the number of customers being disconnected is too high. On 18 February 2015, the Minister for Energy and Resources launched a review of retailers policies and practices supporting customers experiencing financial hardship avoid disconnection. The ESC is undertaking this review and released its consultation paper on 27 March Currently, the ESC is also auditing energy retailers, focusing in particular on the implementation of ESC approved hardship policies and energy retailer adherence to the HC. 32 About this Report In late 2014, CUAC undertook a desktop review of legislation, codes, guidelines and orders-incouncil (OICs), 33 with the aim of providing an overview of the consumer protections which apply to the retail of energy in Victoria. CUAC s review found that some of the protections now in place are no longer relevant to the experiences of consumers in light of the ongoing changes in the energy market and there are significant gaps. This regulatory review is a response to these findings. The purpose of this review is to: Review the suite of Victorian energy consumer protections found in legislation, codes, guidelines and OICs; Provide a broad overview of the consumer protections that apply to the retailing of energy in Victoria, paying particular attention to the provisions relating to hardship and disconnection; Identify and address gaps arising from the ESC s harmonisation process, technological advances and/or issues arising from market behaviour; Use the findings and provide recommendations for the ESC s consultation paper, Inquiry into the Financial Hardship Arrangements of Energy Retailers: Our Approach; 34 Advocate for the retention and enhancement of key consumer protections as Victoria transitions to the NECF; Provide a useful resource for government, consumer advocates and consumer organisations; and Raise awareness in the Victorian consumer community. CUAC has undertaken a detailed analysis of the pre-harmonisation energy consumer protections and compared them to the post-harmonisation energy consumer protections. In particular, the review of the HC is through the lens of the Victorian consumers rights and protections paying 30 Victorian Labor, ESC Powers 31 Essential Services Commission (March 2015), Inquiry into the Financial Hardship Arrangements of Energy Retailers: Our Approach, p Ibid, p Consumer Utilities Advocacy Centre (May 2015), CUAC Regulatory Review: A Comparative Analysis of Key Consumer Protections in Victoria, Appendix C. 34 Essential Services Commission (March 2015), Inquiry into the Financial Hardship Arrangements of Energy Retailers: Our Approach 6

13 close attention to the provisions on hardship and disconnection. 35 This comparison allowed CUAC to identify where consumer protections have been eroded and develop a list of key areas for consideration. CUAC then consulted with key consumer advocates to prioritise areas for further analysis. There are two volumes to CUAC s report: Volume 1 provides A Critical Review of Key Consumer Protections in Victoria; and Volume 2 provides A Comparative Analysis of Key Consumer Protections in Victoria..36 Our research findings and recommendations are found in volume 1. Appendix A of this volume reiterates the recommendations made in the report. Volume 2 has three appendices: Appendix A provides a detailed comparison of the ERC and the HC; Appendix B provides a simple overview of the national regulatory framework for reference; and Appendix C provides a list of Victorian energy regulations and OICs. 35 Consumer Utilities Advocacy Centre (May 2015), CUAC Regulatory Review: A Comparative Analysis of Key Consumer Protections in Victoria, Appendix A. 36 Both volumes are available on CUAC s website 7

14 Analysis of key consumer protections Market Retail Contracts The design of the energy market enables energy retailers to offer contracts in two forms; standard retail contracts (SRCs) 37 and market retail contracts (MRCs). 38 When these offers were first introduced to the market, a majority of consumers were on SRCs. Today the vast majority of consumers are now on MRCs. While the terms and conditions of MRCs will vary, the types of energy and service offers that are currently provided in the market were not contemplated when the original regulations were written. MRCs are an attractive option for consumers as a cheaper alternative to SRCs, with seemingly high discounts. However, the trade-offs for lower prices have led to questionable outcomes for consumers, including the loss of key protections in their contractual terms and conditions. This has a high consumer impact as 77 per cent of consumers are on MRCs. 39 Previously under the ERC 40, consumers in Victoria were given greater protections for MRCs to the extent that most of the terms and conditions of MRCs were prescribed. 41 Currently, the HC and the NECF allow energy retailers to vary the terms and conditions of MRCs (but not SRCs) considerably. As a result, the majority of the market is not covered by consumer protections they previously experienced and are less likely to be aware of this. In light of the ability of energy retailers to vary key consumer protections in MRCs, CUAC has identified the following protections as critical to maintain in both MRCs and SRCs: Prior notification of any variation to the amount and/or structure of tariffs; Bill smoothing; Pay-by dates; Connection and reconnection timeframes; Disconnection provisions; and Hardship provisions. Transparency and clarity are essential to enable consumers to make informed choices in the market. The majority of consumers will not examine or understand the terms and conditions of their contract. Consumers would not expect key protections to be absent from MRCs but present in SRCs from the same energy retailer. MRCs in particular need to articulate key consumer protections, especially in the context of Victoria s deregulated energy market and smart meter environment (see Existing & Emerging Technologies). CUAC is concerned about the NECF and HC entrenching the disparity of consumer protections between SRCs and MRCs. The current disparity, if continued, will affect the most vulnerable consumers. The NECF and HC provisions must be clear and specific to ensure that contract terms and protections are consistently in place. 37 The term standard retail contract (SRC) which is used in the HC, was previously known as a standing offer under the ERC. 38 The term market retail contract (MRC) which is used in the HC, was previously known as a market offer under the ERC. 39 Wallis Strategic Market & Social Research (August 2013), Victorians Experience of the Electricity Market Final Report, p.24: Based on the definition of being on a market contract presently, just over three quarters (77 per cent) of Victorians are on one, an increase from two thirds (68 per cent) when last measured in This is a figure from a 2013 report which has potential to be significantly higher at the time this report was written. 40 Energy Retail Code (version 10a, December 2013). 41 Ibid, see also Consumer Utilities Advocacy Centre (May 2015), CUAC Regulatory Review: A Comparative Analysis of Key Consumer Protections in Victoria, Appendix A. 8

15 Monitoring and enforcement are difficult where the provisions of the NECF and HC are unclear and ambiguous. Priority areas where ambiguous and/or inconsistent drafting have the potential to lead to uncertainties in interpretation include the following: Disconnection provisions, in particular the disconnection timeframes and the application of the provisions to MRCs it is troubling that Victoria now has the highest retail margins in the country 42 and the highest rate of disconnection 43 (see Disconnection); and Payment plan and customer hardship provisions (e.g. whether all of the Customer Hardship provisions apply to both SRCs and MRCs). CUAC believes further variations to these key protections in particular, not only have the potential to diminish consumer protections, but will undermine consumer confidence in the energy market. Recommendation 1 That the Victorian Government: a. Maintain key consumer protections for market retail contracts in the Harmonised Code (version 11, 1 January 2015) that were previously under the Energy Retail Code (version 10a, December 2013). b. Direct the Essential Services Commission to review the Harmonised Code (version 11, 1 January 2015): i. To assess key consumer protections that must be included in market retail contracts, with the following protections as a priority: prior notification of any variation to the amount and/or structure of tariffs, bill smoothing, pay-by dates, connection and reconnection timeframes, disconnection and hardship provisions. ii. With a view to ensuring that the language/wording is clear and consistent, with no contradictions, that terms are appropriately defined and that each provision clearly states whether it applies to a standard retail contract and/or a market retail contract. That the COAG Energy Council: c. In their review of the National Energy Customer Framework, evaluate the relevance of the National Energy Customer Framework to current market conditions, its ability to respond to the substantial changes in the market, particularly in the context of market retail contracts. 42 Essential Services Commission (May 2013), Retailer Margins in Victoria s Electricity Market Discussion Paper, p.15; see also SKM MMA (May 2013), Analysis of Electricity Retail Prices and Retail Margins , Report for Essential Services Commission. 43 Essential Services Commission (December 2014), Energy Retailers Comparative Performance Report Customer Service , p.27. 9

16 Fees & Charges Some energy retailers have been responsible for misleading conduct that confuses and deceives consumers by offering incentives that ultimately work to the consumer s disadvantage. As discussed earlier in the section on Market Retail Contracts, many energy retailers attract customers to MRCs by offering discounts and/or additional incentives such as pay on time or direct debit discounts. In some instances, consumers have been misled by these sugared market offerings. Recently, the ACCC has fined energy retailers for engaging in misleading conduct. 44,45 A recent assessment 46 of energy retail prices in Victoria demonstrated how energy retailers can manipulate prices when there is an increase to an energy retailer s standing offer. Market offer rates typically increase by the same proportion in order to provide a greater discount amount. 47 The ACCC is giving attention to this area by monitoring and tracking MRCs and by conducting research into how these offers affect the market in their discount off what promotions area of work. Unclear terms and conditions of contracts (and MRCs in particular) often result in consumers paying excess fees and charges. These include late payment fees, missed pay on time discounts and exit fees. Providing adequate protection against this type of behaviour will be a significant issue if Victoria is to transition to the NECF. In addition to the disclosure regulations required in the HC and the NECF, there is a deficit in consumer understanding of market offerings and associated fees and charges. Often these offers are complex and difficult for consumers to understand and compare. Factors such as the underlying unit cost, the application of discounts, and the duration of the discount including the unit cost that will apply when the fixed benefit period expires 48 contribute to the confusion of consumers. Consumers require additional information to adequately assess a market offer, including clarity of information around fees and charges that apply to discounts. Low income and vulnerable consumers sign onto offers that they believe will give them greater discounts. This is, in part, due to the lower contract literacy levels among low income and vulnerable consumers when navigating through MRCs and the terms and conditions of their contracts. 49 To address this issue, Government funded initiatives such as, My Power Planner and the EnergyInfoHub 50 have 44 Australian Competition & Consumer Commission (February 2015), Origin Companies ordered to pay penalties of $325,000 for misleading consumers about discounts under energy plans, media release. Found at: <accessed on 13 April 2015>. 45 ACCC v AGL South Australia Pty Ltd [2014] FCA 1369:The Federal Court of Australia found that AGL South Australia Pty Ltd (AGL) made false or misleading representations and engaged in misleading or deceptive conduct, concerning the level of discount that residential customers in South Australia would receive under AGL s energy plans. See also: (a) Australian Competition & Consumer Commission (June 2013), Discount off what? Energy plan promotions a concern, media release. Found at: <accessed 29 April 2015>; (2) Australian Competition & Consumer Commission (April 2015), AGL South Australia Pty Ltd was ordered to pay $700,000 penalty and to offer refunds to consumers for false or misleading discount representations, media release. Found at: <accessed on 29 April 2015>; (3) ABC (April 2015), AGL cops $1 million penalty for misleading 30,000 South Australian customers over discounts. Found at 29/agl-gets-one-million-penalty-for-misleading-customers/ <accessed on 29 April 2015>. 46 St Vincent de Paul Society (January 2014), Victorian Energy Prices January 2014: An Update-Report on the Vinnies Tariff- Tracking Project. 47 Ibid, p.18. See also, The Age (March 2015), Electricity charges for some Victorian households up to $800 more than they need to be: Deregulation in Victoria has also allowed retailers to take advantage of customers who don't look for a better deal. Retailers have been able to increase profits by raising the price of their standing offers, yet they remain competitive by offering large discounts on their market offers. Found at: <accessed on 13 April 2015>. 48 Ibid. 49 Consumer Action Law Centre (February 2015), Submission to the 2015 Retail Competition Review Approach Paper p The EnergyInfoHub serves as a resource for energy information to help Victorian community organisations support their clients and communities. Found at <accessed on 13 April 2015>. 10

17 been created to better inform the public and provide tailored and targeted information for vulnerable consumer groups. These have both assisted consumers to make their best personal choice. The AER recently initiated a review of the retail pricing guideline and factsheets following an AEMC recommendation (see Fixed Term Contracts) for jurisdictions under the NECF to improve clarity around offers. This included consultation with consumer groups and energy retailers. While this review does not apply to Victoria, the AER has consulted with CUAC and other Victorian consumer organisations. The Victorian Government has stated that fixed term contracts should have fixed pricing. Steps will be taken to prohibit energy retailers from charging early termination fees to customers who leave after the price has been varied (see Fixed Term Contracts). 51 Finally, late payment fees are currently prohibited in Victoria under section 40C of the Electricity Industry Act 2000 and section 48B of the Gas Industry Act In its final decision on harmonisation, 52 the ESC determined it was necessary to maintain the prohibition on late payment fees. However, under the NECF, an energy retailer may impose a late payment fee as long as it does not exceed the reasonable cost of the energy retailer recovering the amount. 53 The interpretation and evidence of reasonable costs are problematic. If Victoria transitions to the NECF, late payment fees will apply unless Victoria derogates from this provision. Recommendation 2 That the Victorian Government: a. In their current review of the energy retail market, give attention and consideration to what protections are needed for consumers to better engage with and understand market retail offers under the Harmonised Code (version 11, 1 January 2015). b. Follow through with its stated position to prohibit energy retailers from charging exit fees for customers leaving fixed term contracts due to price variations and to consider extending this ban more broadly. c. Continue to promote My Power Planner and the EnergyInfoHub as tools to better inform the public and provide tailored and targeted information for vulnerable consumer groups. d. Maintain the prohibition on late payment fees. e. Ensures that if Victoria transitions to the National Energy Customer Framework, Victoria derogates to: i. Continue its ban on late payment fees; and ii. Prohibit energy retailers from charging exit fees for customers leaving fixed term contracts due to price variations (see recommendation 2b above). 51 ABC (February 2015), Fixed costs for gas and electricity in Victoria up over 50pc: report. Found at: <accessed on 13 April 2015>; The Age (April 2015), Victorian state government to reform electricity pricing. Found at: <accessed on 23 April 2015>. 52 Essential Services Commission (July 2014), Harmonisation of the Energy Retail Code and Guidelines with the National Energy Customer Framework Final Decision Paper, p National Energy Retail Law (South Australia) Act (2011), s

18 That the COAG Energy Council: f. Consider in their review of the National Energy Customer Framework whether it is appropriate to current market conditions, with a view to determining the consumer protections that are required for consumers to better engage with and understand market retail offers, so that consumers in all jurisdictions benefit from the review. Disconnection Disconnection rates have been on an upward trend since (see Figure 1). This is despite the fact that until October 2014, when the first version of the Harmonised Energy Retail Code 54 came into effect, Victoria s consumer protections in the ERC were the strongest compared with other jurisdictions. The HC incorporates the less stringent NECF consumer protections on disconnection. In particular: The timeframes between the issue of a bill and actual disconnection for non payment are shorter. This is a concern as customers on fixed incomes often need two fortnightly payments to be able to pay their bills; The notification requirements have been reduced for dual fuel customers. This is significant as Victoria has the highest number of dual fuel households compared with all the other States. Around 75 per cent of Victorian households have an electricity and mains gas connection; 55 The notification requirements for a shorter collection cycle period have been reduced; and Poor and inconsistent drafting of the NECF and HC, have led to uncertainties when interpreting the disconnection provisions in particular the disconnection timeframes and/or the application of the provisions to market retail contracts (see Market Retail Contracts). 56 The consequences of disconnection are severe for a household, especially those that are already disadvantaged, and pose real safety, health and welfare concerns. There is a significant danger that the lower HC protections, unless they are improved, will exacerbate an already alarming trend, which will be discussed further in this section. 54 The current version of the Harmonised Code is version 11, 1 January Consumer Utilities Advocacy Centre (August 2014), Our Gas Challenge: The Role of Gas in Victorian Households, p3. 56 See De-energisation in Consumer Utilities Advocacy Centre (May 2015), CUAC Regulatory Review: A Comparative Analysis of Key Consumer Protections in Victoria, Appendix A. 12

19 Rising Disconnections Figure 1: Disconnections and reconnections in Victoria Residential and business, electricity and gas, 1990 to Victoria s electricity disconnection rate is now the highest in Australia. 58 Disconnections spiked following the introduction of full retail competition in The then Victorian Government intervened to address this by introducing wrongful disconnection payment (WDP) in Disconnections fell in response to this. However, since (and following price deregulation in 2009) disconnections have been steadily rising and are now approaching the historically high rates of the 1990s. 60 Rising disconnections are also reflected in EWOV complaints data. EWOV reported that in comparison with , more energy disconnection complaints received in went to investigation because of their complexity, largely due to issues around the customer s capacity to pay. 61 In their Annual Report, the credit sub-issue of disconnection/restriction replaced high bill as the top complaint issue overall for the first time. 62 While EWOV s latest Affordability Report indicates that credit cases have decreased by 13 per cent between the last two quarters, 63 they did so less sharply than EWOV cases overall. The proportion of EWOV cases primarily about a credit issue continued to increase. 64 While there has been a decrease in EWOV energy 57 Essential Services Commission 2014 (December 2014), Energy Retailers Comparative Performance Report Customer Service , p Ibid, p.27. During , the disconnection rate per 100 customers for Victoria was 1.47; for New South Wales 1.03; for South Australia 1.37, for Queensland 1.31; for ACT 0.17; for Tasmania 0.68; and for Western Australia Where an energy retailer is found to have disconnected a customer s supply without complying with the terms and conditions of their contract, the energy retailer must make a payment to the customer of $250 per day (or part thereof), capped at $3,500 if the customer does not contact the retailer within 14 days. 60 Essential Services Commission 2014 (December 2014), Energy Retailers Comparative Performance Report Customer Service , Figure 4.1, p Energy and Water Ombudsman (Victoria), EWOV Annual Report 2014, p Ibid, p.23. Credit, with its sub-issues of disconnection/restriction of supply, collection of debt and payment difficulties is essentially about the capacity of customers to pay bills and stay on supply. 63 Between 1 July 30 September 2014 and 1 October 31 December Energy and Water Ombudsman (Victoria) (February 2015), Quarterly EWOV Affordability Report 1 October-31 December 2014, p.5. Increased from 24 per cent in the July-September 2014 quarter to 26 per cent in the October-December 2014 quarter. 13

20 disconnection cases in the last two quarters, 65 CUAC is of the view that the level of disconnection rate remains a concern in Victoria. Based on CUAC s research, CUAC believes that there is strong connection between the disconnection rate, the number of WDPs made and the hardship support offered by energy retailers to customers experiencing financial hardship. EWOV found that in many disconnection cases, customers have not been provided with all the hardship support options available under the ERC or HC and often have their energy supply wrongfully disconnected. Further, some energy retailers will only agree to reconnect supply if the customer pays their account in full or makes a significant one-off payment, disregarding the customer s capacity to pay. 66 It appears that WDP no longer deters industry from wrongfully disconnecting households. The ESC has expressed concern over the alarming rise in the number of wrongful disconnections. In , wrongful disconnections accounted for 1,022 of the reported 1,274 breaches of codes, guidelines and regulations. 67 For the period , EWOV opened 2,307 investigations into possible wrongful disconnection of energy supply, 37 per cent more than in and 234 per cent more than four years ago. 71 per cent of EWOV s finalised WDP assessments resulted in a payment by the energy retailer to the affected customer. 68 While the number of WDPs has fallen over the last quarter of 2014 (see Figure 2), the number of WDP complaints EWOV receives is still substantial. 69 The proportion of WDPs payable suggests that energy retailers are not providing appropriate levels of assistance to customers before disconnecting their supply. The 322 EWOV cases (1.3 cases each day) where the energy retailer made a WDP to the customer because it did not provide the appropriate level of hardship support before disconnection suggests that there is a correlation between WDPs and hardship support. 70 The ESC s Energy Retailers Compliance Report confirms that [a] large portion of the wrongful disconnections reported in were due to non-compliance with clauses in the Retail Code that are designed specifically to protect customers who may be facing payment difficulty. 71 Interestingly, the upward trend in disconnections corresponds to a growth in retailer margins. In the five years to , gross retailer margins have increased by between 20 per cent (market offers) and 60 per cent (standing offers), accounting for between 20 and 30 per cent of the higher prices observed in market and standing offers Between 1 July to 30 September 2014 and 1 October to 31 December EWOV s latest Quarterly Affordability Report for 1 October to 31 December 2014, showed a 16 per cent decrease in total energy disconnection and water restriction cases. See also Energy and Water Ombudsman (Victoria) (March 2015), A Closer Look at Affordability: An Ombudsman s Perspective on Energy and Water Hardship in Victoria, p.30. CUAC notes that this fall in the disconnection rate may also be partly due to energy retailers being prohibited from disconnecting customers between 20 December and 31 December each year. 66 Ibid, p Essential Services Commission (April 2015), Energy Retailers Compliance Report , p.1, Energy and Water Ombudsman (Victoria), EWOV Annual Report 2014, p.24; Energy and Water Ombudsman (Victoria) (March 2015), A Closer look at Affordability: An Ombudsman Perspective on Energy and Water Hardship in Victoria, p Energy and Water Ombudsman (Victoria) (February 2015), Quarterly EWOV Affordability Report, 1 October-31 December 2014, p.13; Energy and Water Ombudsman (Victoria) (March 2015), A Closer look at Affordability: An Ombudsman Perspective on Energy and Water Hardship in Victoria, p Energy and Water Ombudsman (Victoria) (March 2015), A Closer look at Affordability: An Ombudsman Perspective on Energy and Water Hardship in Victoria, p Essential Services Commission (April 2015), Energy Retailers Compliance Report , p.1. see also p Essential Services Commission (May 2013), Retailer Margins in Victoria s Electricity Market Discussion Paper, p.15; see also SKM MMA, (May 2013), Analysis of Electricity Retail Prices and Retail Margins , Report for Essential Services Commission. 14